UK: ‘Phoenix’ Pre-packs

Last Updated: 31 August 2011
Article by Mark Howard, James Hyne and Geoff Sparks

On March 31 the minister for business innovation and skills, Ed Davey, announced proposals to require administrators to give notice (a three-day notice period has been suggested) to creditors where they propose to sell a significant proportion of the assets of a company or its business to a connected party in circumstances where there has been no open marketing of the assets.

The proposals are described as aiming to improve the transparency of, and confidence in, pre-packaged (pre-pack) sales by administrators, who have been criticised for rushing through the sale of insolvent businesses, leaving creditors with little or no time to question the sale.

A so-called 'pre-packaged sale' is a sale of all or part of the business and assets of an insolvent company which is negotiated before the company enters a formal insolvency process and which is concluded immediately upon the company's entry into an insolvency procedure – often administration.

Davey suggested: "This will enable creditors to express concerns, which the administrator would need to consider or, where the circumstances justify it, apply to the court to prevent the sale from taking place."

Administrators already need to provide a detailed explanation of why a pre-pack sale was undertaken to creditors in compliance with professional standard Statement of Insolvency Practice 16. Under the new proposals these will in future need to be included in their administration proposals which are lodged at Companies House, making the information available to the public at large, including credit reference agencies. Administrators will also need to confirm that the sale price represents best value for the creditors.

Davey commented: "Particular concerns have been raised about sales of assets back to the current management, or other connected party, something that is often referred to as 'phoenixism'. Where such sales are at undervalue, creditors get less than they should. Competitors who pay their debts in full also suffer. I want to make sure that creditors have a fair chance to have their voice heard. I also want to enable others to scrutinise such transactions after the event to ensure that deals being struck are fair in the circumstances."

James Hyne, head of insolvency & corporate recovery at Charles Russell, commented: "Mr Davey appears to have overlooked the fact that if an administrator sells the assets of a company at an undervalue, creditors have an express statutory remedy pursuant to the misfeasance provisions of para 75 of schedule B1 Insolvency Act 1986. Perhaps more worryingly, the proposal to impose a notice period (of possibly three days) published to the world at large could have detrimental consequences for the continuity of a business and its goodwill, potentially adversely affecting the interests of creditors which is precisely the opposite of what was intended by this proposed change."

Charles Russell Oxford-based partner Mark Howard commented: "While appropriate checks and balances are clearly required, we need to recognise that very often those best placed to understand the risk profile of the business and its value are the incumbent management team. With speed and confidentiality so often the key to preserving value and therefore delivering a successful outcome for creditors these proposals could result in more liquidations, meaning more unsecured creditors losing out."

Geoff Sparks, head of corporate & commercial at Charles Russell's Guildford office, said: "Acquiring assets from an administrator or liquidator can provide purchasers with good value opportunities. However, purchasers need to be aware of the risks and potential liabilities that accompany this type of transaction. Our cross-office insolvency and corporate recovery team handle a variety of transactions in this practice area (advising buyers, sellers, insolvency practitioners and creditors) and are on hand to help clients negotiate the complicated legal issues which insolvency and restructuring involves."

No timeframe has yet been suggested for the implementation of these proposals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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